What could a progressive alternative to tax credits look like?

In this essay, Common Weal policy looks at the history of tax credits and its role as a sticking plaster for a low-pay, unequal economy, and proposes a new politics of welfare based on the idea of 'the commons'

Summary of key points:

- The politics and language of welfare has been defined by the right-wing in British politics and has been artificially split off from the issue of our unequal, low-pay economy

- The idea of a 'negative tax system' was imported from the US, and was introduced to subsidise low-pay at a time of rapidly rising inequality in the 1980's

- Tax credits became increasingly important in New Labour's 'third way' approach which covered up low-pay and rising inequality through increasing direct cash payments from the state to the poor

- If the minimum wage was used as a direct alternative to tax credits, it would be over PS20 an hour--and that would only return the UK to 1999 levels of inequality, when tax credits were first introduced

- The idea of 'the commons' can redefine the politics of welfare as being about the collective social good rather than cash being given to poor individuals by the state

Changing the welfare debate

The furore around Labour's abstention on the Tories welfare bill, which will see PS12bn in cuts to social security, has put the spotlight on working tax and child tax credits--benefits for people in-work. Tax credits make up the vast bulk of Chancellor George Osborne's savings through a four-year freeze and taking child tax credit away after the second child for new claimants.

The debate has been stuck within a very limited scope of thinking about what welfare means and what the role of tax credits is within that system.

The best of the argument at Westminster, from the SNP, Lib Dems and rebel Labour MPs, is to defend a tax credit policy that was introduced as a sticking plaster for a low-wage economy. The worst of the argument, from the Tories and Labour, is to fight over who is toughest on deficit reduction and hardest on the poor.

While condemning Labour MPs who won't oppose a Bill that will see a substantial rise in in-work poverty, there should also be a concerted effort to raise the level of debate and offer real solutions. We should move away from seeing welfare and 'the welfare state' in abstraction, and instead contextualise it within the problem of our highly unequal, lacklustre economy.

The politics of welfare needs to be reconceptualised as a project of 'the commons'--welfare should be for all of us and part of our collective social good.

Social housing (or the lack of it) is the commons, healthy and affordable food is the commons, cheap and efficient energy is the commons, well-paid and secure employment is the commons, and so on.

"'Housing benefit' denotes housing support as a gift to tenants, when really it is a subsidy to landlords who charge extortionate rents in our unregulated private housing market."

The dominant narrative of welfare--the state giving handouts to the poor--has been helpful to those on the right who want to define social and economic problems as solely issues of individual responsibility and personal values. This inevitably leads to social division--the employed are pitted against the unemployed, 'scroungers' v 'savers' and so forth.

Think about the official language of welfare politics in the UK. 'Housing benefit' denotes housing support as a gift to tenants, when really it is a subsidy to landlords who charge extortionate rents in our unregulated private housing market.

The unemployed are described as the 'workless' and are 'welfare recipients' when their position is a reflection of economic failure. There was a time when two million people being unemployed would have been enough to topple Prime Ministers as it was seen as a social and economic problem, and full employment was a realistic aim and it was the job of government to achieve it.

'Tax credits' conjures up the idea of a bonus for people being in employment, when in reality it is simply a subsidy to employers for low-pay.

We will focus on tax credits, since this is at the heart of the debate around the Welfare Bill. To understand tax credits and what a progressive alternative could be, we need to understand where tax credits first came from.

From Milton Friedman to Ronald Reagan to Gordon Brown

Tax credits were introduced by Labour Chancellor Gordon Brown in 1999, and were quickly extended in scope and financial weight to become a fundamental part of income support for the low paid.

As Prospect magazine has pointed out , the idea is an import from the US and is a watered down version of Milton Friedman's vision for welfare, which essentially saw tax support for low-income families being the only means of financial support for the poor. This is known as a "negative tax system", and is fundamentally a right-wing idea as rather than raising incomes and increasing tax returns, it limits tax take by withdrawing some of it in return for a bonus sum of money to subsidise low-pay.

The rise of this sort of thinking in the US in the 1980's reflected the fact that low-pay was becoming an increasingly prevalent issue, and therefore the notion of "making work pay" entered the political lexicon.

As economist Richard Brenner has pointed out , wage repression from 1979-90 in the US saw salaries fall by an average of one per cent per year.

"At no time previously in the twentieth century had real wage growth been anywhere near so slow for anywhere near so long," Brenner surmised.

This was the context for Republican President Ronald Reagan's "workfare" concept. Different from workfare in the UK today, Reagan's workfare was pitched as support for those in paid work, with tax support provided for those on low-incomes at the end of the financial year.

"At no time previously in the twentieth century had real wage growth been anywhere near so slow for anywhere near so long." Economist Richard Brenner on the US in the 1980s

The idea reached Thatcher's Britain (also going through a historic fall in real wages as part of industrial decline) in 1988 in the form of the "family credit", an amount paid to low-income families through the DSS (the old version of the DWP) as an income supplement.

UK state support for the low paid came increasingly through direct cash transfers rather than intervention into the economy over the two decades starting 1980, as economist at NEF James Meadway has pointed out.

"Transfer payments--direct cash transfers, as opposed to expenditure on capital or workers--rose from an average of 30 per cent of total government spending in the 1970s to 43 per cent by 1998," Meadway noted.

income inequality

When Labour entered power in 1997, inequality was reaching new heights and the decade had seen persistently high unemployment and continuing wage restraint.

New Labour's 'third way' strategy was that rather than intervening in the economy and labour market they would use the state to provide greater social protection, extending a process started under Thatcher.

The minimum wage was the stand out policy in this respect, but tax credits as a replacement for the family credit (but still fundamentally an income supplement), and paid by the Treasury rather than the DWP, turned out to be equally important. Tax credits became an increasingly larger proportion of low-paid workers' income as corporations increasingly paid workers below an income that they could comfortably live on.

Tax Credits now

Fast forward to today, and it begins to become clear what Osborne's agenda is in his most recent budget: to roll back the New Labour legacy of tax credits and expose the low-paid even more directly to market forces.

Osborne has offset this slightly with the National Living Wage policy, which is not the real living wage but does increase wages immediately by 70p to PS7.20 an hour, rising to PS9 by 2020.

As the Resolution Foundation has pointed out, the real living wage was calculated with tax credits included in to it. If you take them out, the living wage in London would rise from PS9.15 to PS12.65 an hour.

"Taking tax credits out, the living wage in London would rise from PS9.15 to PS12.65 an hour."

The IFS has made it clear that the importance of tax credits means that, with the new National Living Wage taken into account, 13 million working families will be poorer.

Even before these changes come in, in-work poverty has been rising rapidly. The number of children in poverty in working households has risen from 54 per cent in 2009/10 to 63 per cent in 2013/14--nearly two-thirds.

So the evidence is clear: tax credits have become an essential part of staving off the worst effects of our highly unequal economy for the low-paid. It is a vital sticking plaster, but doesn't address the root problem.

What would happen if the minimum wage was a direct alternative to tax credits?

After fully establishing that a) tax credits historically have been a subsidy for low pay, and b) tax credits are needed to stave off poverty for millions of families, we can look at what a progressive alternative to tax credits might look like.

One approach could be to tackle the problem directly: if this is a problem of low-pay and drastically rising inequality, why not substitute the cost of tax credits to employers?

The One Society think-tank calculated in 2012 what the minimum wage would be if it kept pace with the pay of FTSE 100 CEO's rate of pay increase since the minimum wage was introduced in 1999 (the same year tax credits were introduced). It found that it would be PS18.89 an hour. Since then inequality has worsened and the minimum wage has increased by a derisory 31p: the same rate of pay increase would place the minimum wage at over PS20 an hour today.

"The One Society think-tank calculated in 2012 what the minimum wage would be if it kept pace with the pay of FTSE 100 CEO's rate of pay increase since the minimum wage was introduced in 1999 (the same year tax credits were introduced)."

Compare that to Osborne's policy of PS9 an hour by 2020. Let's bear in mind that while over PS20 an hour may sound a lot, the proposition here is the minimum wage to be increased such as to maintain pace with the 1999 rate of inequality, which was already far higher than 20 years previous (see graph above).

To repeat once more for clarity: a PS20 an hour minimum wage would replace tax credits altogether with 1999 levels of income inequality. When you put it that way it hardly sounds radical, does it? But it is radical, only because subsidies for corporations to pay people below the level they can live on have reached enormous proportions as inequality has got out of control.

The Commons as a reconceptualisation of welfare

A direct alternative to tax credits in the sense outlined above is, of course, neither practical nor the most desirable--it would not be a realistic policy to raise the minimum wage to PS20 an hour (at least not overnight and without subsidies for small and medium size businesses). A direct replacement of tax credits in this way would be a hyper-extension of Osborne's 'National Living Wage' policy to its logical conclusion. The Osborne approach is in and of itself wrong. Inequality can and should be tackled in other ways.

The most important of which is to change power relations in our economy. For example, let's take housing: if a proper social housing sector was created which emphasised affordability and energy efficiency as part of a house building programme, managed locally by tenants themselves, this would have multiple effects on improving incomes and tackling inequality. It would drive down housing costs, it would reduce house prices in the private-sector, and it would create well-paid jobs.

"A transformation in the politics of welfare to make it part of 'the commons': the fundamentals of living in this society as a collective, social good. This is a common weal approach."

The same idea can apply for other parts of 'the commons': food, energy, transport, and so on. This is an approach to welfare which tackles the immediate problem of poverty in tandem with tackling the structural problems of the economy. It is more in tune with what 'the welfare state' originally meant in Britain than what the right-wing distorted version of it is today: the huge house building programme by the 1945 Attlee government was considered part of the 'welfare' of the UK.

Our economy has become so unequal that tax credits can't be done away with overnight and replaced with a progressive labour market and economy based alternative. However, it should be something we are working towards as part of a transformation in the politics of welfare to make it part of 'the commons': the fundamentals of living in this society as a collective, social good. This is a common weal approach.

Picture courtesy of CommonSpace